Do I report a UK bonus issue on Form 5471?

Yes, as a change in share numbers. Category 3 and Category 4 filers show the opening and closing shares issued and outstanding on Schedule A and each US shareholder's holding on Schedule B. After a pro rata bonus issue the counts rise while ownership percentages stay the same. Schedule F reflects the transfer from reserves to share capital. A pro rata issue is not reported as income or as a distribution of earnings and profits.

Is a bonus issue of shares taxable in the US?

Generally no, if it is pro rata on ordinary shares. Section 305(a) of the Internal Revenue Code excludes from gross income a distribution of a corporation's own stock made to shareholders with respect to their stock. Section 305(b) removes that protection in listed cases, including where any shareholder can choose cash instead of shares, where the distribution is disproportionate, and for distributions on preferred stock.

Does HMRC treat a bonus issue as a dividend?

Not in the ordinary case. HMRC's Company Taxation Manual at CTM15450 says a bonus issue of non-redeemable shares will not in general give rise to a distribution unless section 1022 or section 1026 of the Corporation Tax Act 2010 applies, which concern bonus issues linked to a repayment of share capital. Bonus issues of redeemable shares or securities are treated differently, and so is a stock dividend.

Which Companies House forms are used for a bonus issue and a share subdivision?

A bonus issue is an allotment of new shares, so it is reported on form SH01, the return of allotment of shares. A subdivision is notified on form SH02, which covers consolidating, sub-dividing or redeeming shares. Under section 618 of the Companies Act 2006 a subdivision needs a members' resolution authorising it, and the company's articles can exclude or restrict the power, so the articles should be checked first.

Does a share split change my Form 5471 filing category?

A pro rata split does not. Category 4 depends on holding more than 50% of voting power or value, and Category 5 on being a US shareholder with 10% or more of vote or value in a controlled foreign corporation. A split multiplies everyone's shares equally, so percentages are unchanged. A filer who meets both Category 4 and Category 5a checks only Category 4, before and after the split.

What happens to my share basis after a bonus issue or split?

Total basis stays the same and basis per share falls. Section 307(a) of the Internal Revenue Code allocates the adjusted basis of the old stock between the old and new stock where section 305(a) applies. For identical ordinary shares, that means spreading the original basis evenly over the larger number of shares, lot by lot. UK base cost is spread in a similar way under the share reorganisation rules, in sterling.

Form 5471: UK Bonus Issue or Share Split Explained

Form 5471 does not treat a pro rata UK bonus issue or share subdivision as income, as a distribution of earnings, or as a new acquisition of the company: it treats it as a change in the number of shares that has to be recorded accurately. When a UK private company capitalises reserves into new shares, or splits each existing share into many smaller ones, every shareholder ends the day with more shares and exactly the same slice of the company. On the US side that means the share counts on Schedule A and Schedule B move, the equity lines on the Schedule F balance sheet may be rearranged, basis per share falls, and almost everything else stays where it was.

That is the short answer. The longer answer matters because these transactions usually happen just before an investment round, a share option pool or a sale, and in the returns we prepare this is the year in which share numbers on the US filing most often stop agreeing with the Companies House record.

What is a bonus issue, and how is it different from a share subdivision?

A bonus issue is an allotment of new, fully paid shares to existing shareholders, in proportion to their holdings, for which the shareholders pay nothing. The shares are paid up by the company itself, by capitalising profits or reserves: an amount moves out of a reserve and into share capital. HMRC's Capital Gains Manual describes a bonus issue in these terms at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51746, where new shares are allotted to existing shareholders in proportion to their holdings and are issued free. A bonus issue is also called a capitalisation issue or, in older usage, a scrip issue.

A share subdivision is different in mechanics but similar in effect. A subdivision divides each existing share into a larger number of shares with a smaller nominal value. No reserve is capitalised and total share capital does not change: one share of 1 pound becomes, for example, one hundred shares of 1 penny each. Section 618 of the Companies Act 2006, at https://www.legislation.gov.uk/ukpga/2006/46/section/618, gives a limited company the power to sub-divide its shares into shares of a smaller nominal amount, requires the proportion between the amount paid and unpaid on each resulting share to stay the same as on the original share, and allows the power to be used only if the members have passed a resolution authorising it. The articles can exclude or restrict the power, so they are read first.

The practical distinction for the tax file is this:

Bonus issue: the number of shares rises, nominal value per share stays the same, total share capital rises, and a reserve falls by the same amount. Total shareholders' funds do not change.
Subdivision: the number of shares rises, nominal value per share falls, and total share capital and every reserve are unchanged.
Both, if done pro rata: each shareholder's percentage of votes, dividends and capital is identical before and after.

What does the company file in the UK?

The Companies House forms list at https://www.gov.uk/government/collections/companies-house-forms-for-limited-companies shows the two filings that matter here. A bonus issue is an allotment, so it is reported on the Return of allotment of shares (SH01). A subdivision is notified on the form titled Consolidate, sub-divide, redeem shares or re-convert stock into shares (SH02). Each carries a statement of capital showing the share structure after the event. Filing time limits apply to both; we do not restate them here, and the company secretary or filing agent should work from the current Companies House guidance.

Behind the forms sit the internal records: the shareholder resolution, the board minutes, the updated register of members and new share certificates. For a bonus issue the directors also need to be satisfied that the reserve being capitalised may be used for that purpose and is large enough to pay up the new shares. These documents are the evidence the US preparer needs. They fix the date, the ratio, the class affected and, critically, whether every holder of that class participated on the same terms.

How does HMRC treat a bonus issue of ordinary shares?

For UK income purposes, a straightforward bonus issue of ordinary, non-redeemable shares is generally not a distribution. HMRC's Company Taxation Manual at https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm15450 states that a bonus issue of non-redeemable shares will not in general give rise to a distribution unless one of two provisions of the Corporation Tax Act 2010 applies, sections 1022 and 1026. Those provisions deal with bonus issues that are linked to a repayment of share capital, in either order, where the combined effect would otherwise be to pass cash to shareholders without a dividend.

For UK capital gains purposes, a bonus issue is one of the most common forms of reorganisation of share capital, which HMRC discusses on the Capital Gains Manual page cited above by reference to section 126 of the Taxation of Chargeable Gains Act 1992. In qualitative terms, the shareholder is not treated as disposing of the old shares or acquiring new ones: the enlarged holding stands in the shoes of the original holding, with the original cost spread across it. A subdivision works the same way in practice. No gain arises on either event alone, so a plain bonus issue of ordinary shares or a subdivision normally gives a UK resident owner nothing to report, only a lower cost per share to carry forward to a later sale.

Is a bonus issue taxable income for a US shareholder?

Generally not, where it is pro rata and made on ordinary shares. Section 305(a) of the Internal Revenue Code, at https://www.law.cornell.edu/uscode/text/26/305, sets the general rule that gross income does not include the amount of a distribution of a corporation's own stock made to its shareholders with respect to their stock. A UK bonus issue of ordinary shares to all ordinary shareholders in proportion to their holdings is the textbook case.

Section 305(b) then lists the exceptions, and where one applies the stock distribution is treated as a distribution of property under section 301 instead. The exceptions in the statute cover, in summary:

Distributions in lieu of money: any shareholder has an election, exercisable before or after the declaration, to take the distribution in stock or in property such as cash.
Disproportionate distributions: the distribution, or a series of distributions, results in some shareholders receiving property while others see an increase in their proportionate interest in the corporation's assets or earnings and profits.
Common and preferred stock: some common shareholders receive preferred stock while others receive common stock.
Distributions on preferred stock, other than a conversion ratio adjustment made solely to take account of a stock dividend or split on the underlying stock.
Distributions of convertible preferred stock, unless it is shown that the distribution will not have the disproportionate result described above.

The first exception is the one UK owners walk into without noticing. A dividend that each shareholder may take either in cash or in new shares is not, for US purposes, a tax-free bonus issue, even if every shareholder in fact chooses shares. The existence of the choice is what matters under the statute, and the UK treatment as a stock dividend will also differ from that of a bonus issue.

A subdivision involves no distribution in any commercial sense. Each share is simply replaced by several, and US practice treats a pro rata split in the same non-taxable way as a pro rata stock distribution. We describe that as settled practice; the statute cited deals in terms with distributions of stock.

Which Form 5471 schedules change after a bonus issue or share split?

The IRS Instructions for Form 5471 (Rev. December 2025), at https://www.irs.gov/instructions/i5471, set out by filing category which schedules each filer completes. On the filing requirements chart in those instructions, Schedule A and Part I of Schedule B are completed by Category 3 and Category 4 filers, Schedules C and F by Category 3 and Category 4 filers, separate Schedule J by Category 1a, 4 and 5a filers, and Schedule R by Category 4 and 5a filers. The instructions themselves do not mention stock dividends, stock splits or section 305 by name, so the treatment below is an application of the general schedule instructions to these facts.

Schedule A, stock of the foreign corporation. Schedule A describes each class of stock and gives the number of shares issued and outstanding at the beginning and at the end of the annual accounting period. This is where the event shows most plainly. After a bonus issue or subdivision the closing figure will be a multiple of the opening figure. If the subdivision changed the nominal value, the class description should change with it, so that ordinary shares of 1 pound become ordinary shares of 1 penny.

Schedule B, US shareholders of the foreign corporation. Schedule B reports each US shareholder's holding by class, with share numbers at the beginning and end of the period, and the class description should match Schedule A. After a pro rata event the numbers rise but the percentage does not. We add a short explanatory statement to the return so that a reviewer does not have to guess whether shares were bought.

Schedule F, the balance sheet. A subdivision changes nothing on Schedule F. A bonus issue does: the amount capitalised leaves retained earnings, or whichever reserve was used, and is added to the stock lines in the equity section. Total shareholders' equity is the same before and after. The check we run is that the movement in the share capital line equals the nominal value of the bonus shares and equals the fall in the reserve, in the functional currency, before any translation.

Schedule J and Schedule R. Section 312(d) of the Code, at https://www.law.cornell.edu/uscode/text/26/312, provides that a distribution by a corporation of its own stock is not treated as a distribution of earnings and profits where it was not subject to tax in the hands of the shareholder by reason of section 305(a). A tax-free bonus issue therefore leaves accumulated earnings and profits untouched, and Schedule J does not show a distribution because of it. One consequence needs watching in later years: book retained earnings on Schedule F have fallen by the amount capitalised, while earnings and profits on Schedule J have not. A preparer who reconciles one to the other needs to know that this gap is permanent and deliberate. Likewise there is no distribution of earnings and profits to report on Schedule R on these facts.

Does a pro rata bonus issue change your Form 5471 filing category?

No, not by itself. The filing categories in the instructions are built on percentages, not on share counts. A Category 4 filer is a US person who had control of the foreign corporation during the annual accounting period, with control meaning more than 50% of the total combined voting power of all classes of voting stock or more than 50% of the total value of the stock. A Category 5 filer is a US shareholder of a controlled foreign corporation, with US shareholder meaning a US person who owns, directly, indirectly or constructively, 10% or more of the total combined voting power or value of all classes of stock. A shareholder who held 70% of one class before a pro rata event holds 70% afterwards, so neither test moves.

Category 3 needs a little more care, because its wording refers to acquiring stock. The instructions describe a Category 3 filer as including a US person who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement, or who acquires stock which, without regard to stock already owned, meets that requirement. The requirement is 10% or more of the total value of the corporation's stock or of the total combined voting power of its voting stock. The related Category 2 description refers to a US person who has acquired stock meeting the 10% requirement or an additional 10% or more. Read together, the test is concerned with a person arriving at 10%, or adding a further 10% block, measured by proportion. On our reading, bonus shares received pro rata add nothing to a shareholder's proportion of vote or value, so an existing 10% or greater shareholder has not made a Category 3 acquisition and a shareholder below 10% remains below it. We record that reasoning in the working papers, because the share numbers alone can look like an acquisition.

It follows that Schedule O is not triggered by a pro rata event. On the chart in the instructions, Part I of Schedule O is completed by Category 2 filers, who are US citizen or resident officers and directors of a foreign corporation in which a US person has made a reportable acquisition, and Part II is completed by Category 3 filers. Part II includes sections for general shareholder information, acquisitions of stock, dispositions of stock and additional information. If nobody is a Category 2 or Category 3 filer for the year, Schedule O is not part of the return.

How is US basis allocated after a bonus issue or split?

Basis is spread, not increased. Section 307(a) of the Code, at https://www.law.cornell.edu/uscode/text/26/307, provides that where a shareholder receives new stock in a distribution to which section 305(a) applies, the basis of the new stock and of the old stock is determined by allocating the adjusted basis of the old stock between them, under Treasury regulations. Where the new shares are identical to the old ones, as they are in a bonus issue of ordinary shares on ordinary shares, the practical result is that total basis is unchanged and basis per share falls in line with the ratio. A subdivision produces the same arithmetic: the basis of one old share is divided across the shares that replace it.

Where the owner acquired shares in more than one lot, the allocation is done lot by lot. This is the piece most often missing when a sale happens years later, so we update a US dollar basis schedule in the year of the event, not in the year of sale.

On holding period, the general position in US tax law is that shares received in a tax-free stock distribution take the holding period of the shares on which they were distributed, so the bonus shares are not treated as newly acquired. We describe that qualitatively; the precise rule should be confirmed against the Code for the facts in hand.

Worked scenario: a 9 for 1 bonus issue followed by a 100 for 1 subdivision

The following is an illustration only. The company, the people and every figure are invented, and the dollar basis is an assumed figure, not a conversion at any stated exchange rate.

A UK private company has 100 ordinary shares of 1 pound in issue. A US citizen living in London holds 70 and a UK national co-founder, who is not a US person, holds 30. The company has substantial distributable reserves. Ahead of an investment round, and so that an option pool can be granted in whole shares, the shareholders pass resolutions for two steps in the same accounting period.

Step one is a bonus issue of nine new shares for each share held, paid up by capitalising 900 pounds of the profit and loss reserve. The company now has 1,000 ordinary shares of 1 pound: 700 held by the US owner and 300 by the co-founder. An SH01 is filed. Step two is a subdivision of each 1 pound share into 100 shares of 1 penny. The company now has 100,000 ordinary shares of 1 penny: 70,000 and 30,000. An SH02 is filed. Share capital has risen from 100 pounds to 1,000 pounds because of step one, and is unchanged by step two.

On the US return for that year, the owner is a US person with more than 50% of vote and value, so the company is a controlled foreign corporation and the owner meets Category 4 and Category 5a, checking only Category 4. Schedule A shows 100 shares at the beginning of the period and 100,000 at the end, with the class described by its new nominal value. Schedule B shows the owner at 70 shares opening and 70,000 closing. Ownership is 70% throughout. Schedule F shows 900 pounds moving from retained earnings to share capital. Schedule J shows no distribution, because under section 312(d) a stock distribution that is not taxable under section 305(a) is not a distribution of earnings and profits. No Schedule O is required, since nobody is a Category 2 or Category 3 filer.

Suppose the owner's US basis in the original 70 shares is an assumed 140,000 dollars, or 2,000 dollars a share. After the bonus issue the same 140,000 dollars is spread over 700 shares, or 200 dollars a share. After the subdivision it is spread over 70,000 shares, or 2 dollars a share. Nothing has been gained or lost. If the owner later sells 7,000 shares to an incoming investor, the basis in the shares sold is 14,000 dollars, a figure that can only be produced if the two steps were tracked.

What if only some shareholders receive the new shares?

Then it is not the transaction described above, and none of the comfortable conclusions can be assumed. A non-pro-rata issue changes percentages. Take a variation on the scenario: a second US person holds 8% of the company and, as part of the same exercise, is allotted additional shares that others do not receive, taking the holding to 12%. That person has acquired stock which, when added to stock already owned, meets the 10% requirement, so the Category 3 description in the instructions is met, Schedule O Part II comes into play for the acquisition, and the person is now a US shareholder for Category 5 purposes as well. Any US citizen or resident who is an officer or director of the company has to consider Category 2 and Schedule O Part I for the same event.

Shareholders who did not receive shares are diluted, and a US owner sitting just above 50% or just above 10% can fall through a threshold without selling anything. The income analysis also has to be reopened. The questions become why the shares were issued to that person and what was given for them. Shares issued in connection with services raise an employment income question in both countries. Where some shareholders receive cash or other property and others receive an increased proportionate interest, the disproportionate distribution exception in section 305(b) is in point. Each of these needs to be worked through on its own facts before the return is prepared.

What records should a US owner keep, and what do preparers get wrong?

The failure mode we see most often is not a wrong tax answer but a mismatch of records. The filing agent files the SH01 or SH02, the registers are updated, and nobody tells the person preparing the US return until a share count on next year's accounts looks odd. By then the year of the event may already have been filed with identical opening and closing share numbers.

The file for the year of a bonus issue or subdivision should contain the shareholder resolution and board minutes, the filed SH01 or SH02 with its statement of capital, the register of members before and after, the accounts note showing the movement between reserves and share capital, an updated basis schedule by lot in US dollars, and a short memorandum recording why the event was treated as pro rata and why no filing category changed. An investment round or option grant later in the same period is a separate event and should be documented separately.

If an earlier year's return was filed with share numbers that ignored a bonus issue or split, the error is usually one of disclosure, with no income effect, but it should still be corrected so that the opening position on the next return agrees with the last. Reconciling the share history to the Companies House record is one of the first things we do when preparing Form 5471 for an existing UK company.